In normal market conditions, diversification is the key to the success of an investment portfolio. On the other hand, during periods of recession or heightened market volatility, it often seems like the rules change, and it can feel like an impossible task to find segments that are poised to benefit because during times when most sectors move in lockstep. One theme that often captures the attention of active traders during difficult times is the concept of increased exposure to sin stocks.
For those new to finance, sin stocks represent the segments of the market that are often associated with an activity that is considered unethical or immoral such as the consumption of alcohol or tobacco. The primary idea is that consumers will cut spending in nearly every area of their lives other than vice and leisure. In this article, we'll take a look at a common fund used to track alcohol and tobacco companies along with two top holdings that are geared more toward testing and detection of abuse.
AdvisorShares Vice ETF (ACT)
Traders who are interested in gaining exposure to niche market segments such as tobacco and alcohol companies often turn to exchange-traded products such as the Advisor Shares Vice ETF (ACT). As you can see from the chart below, the price has recently moved above the long-term resistance of its 200-day moving average, retraced toward the newfound support, and started to resume the move higher.
Traders will want to note how the recent increase in buying pressure has triggered a breakout beyond the resistance of the previous swing high and how the momentum has triggered a bullish crossover between the 50-day and 200-day moving average. This long-term buy signal is one of the most popular among followers of technical analysis and often marks the beginning of a primary uptrend. From a risk-management perspective, stop-loss orders will most likely be placed below $23.02 in order to maximize the risk/reward of the trade and to protect against a sudden shift in market sentiment.
Thermo Fisher Scientific Inc. (TMO)
With a weighting of 8.19%, Thermo Fisher Scientific Inc. (TMO) sits as the second position within the ACT portfolio. As you can see from the weekly chart below, the stock has been trading within a defined channel pattern since mid-2018, with the brief exception of the breakdown this past March.
This chart clearly shows that the bulls are in control of the long-term trend, and the recent break above the upper trendline even suggests that the upward momentum could accelerate over the weeks and months ahead. Depending on risk tolerance and outlook, the dotted trendlines suggest that stop-losses will most likely be placed below $400 or $350 to protect against a shift in underlying fundamentals.
Abbot Laboratories (ABT)
Another top holding of the ACT ETF, with a weighting of 6.51%, that could be worth a closer look over the days ahead is Abbot Laboratories (ABT). Taking a look at the chart below, you'll notice that the price has recently been trading within a period of consolidation since breaking beyond the 200-day moving average back in April.
The bullish crossover between the 50-day and 200-day moving average shown by the blue circle was a clear sign that the bulls took over control of the long-term momentum. The recent bounce from the 200-day moving average and close above the nearby resistance levels confirm that the bulls are in control, and now that all recent levels of resistance have been cleared, it is likely that traders will expect a move higher over the days and weeks ahead.
The Bottom Line
The continued spending on vices such as alcohol and tobacco has captured the attention of active traders. Based on the patterns discussed above, it looks as though this segment, along with key companies associated with toxicology, could be worth watching.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.